"If the founders don’t stay, you’ve ended up buyin

Entrepreneurialism is hardly a bad thing for the PR industry. Low (non-existent?) barriers to entry mean that anyone, anywhere can set up a PR agency at any time. In many countries, furthermore, you could even argue that tax breaks actually incentivise people to start new businesses. This ensures a steady of flow of new agencies, new thinking and new talent, bringing with it the kind of restless energy that lights up key PR markets across the globe.
For the big holding groups, meanwhile, that entrepreneurialism can be tapped as a shortcut to growth and geographic expansion, via acquisition. Publicly-held firms like to say that they empower their senior leaders to be entrepreneurs. Typically, however, they are structured to reward bean-counters rather than risk. Thus, it becomes easier to 'buy' entrepreneurial agencies, in the hope that — at the very least — the new assets will provide something more than just a temporary balance sheet boost.
Those assets, primarily, are the entrepreneurs that have founded these agencies. And yet, it is still relatively uncommon for founders to stick around once the earn-out period is over. This was brought home in no uncertain fashion this week by the news that Tonic Life's founders are to depart Huntsworth following the completion of their agency sale in mid-2013.
Meanwhile, Mitchell Kaye, who founded Mischief and sold it to Engine in 2011 as one of London's hottest PR firms, has launched his second agency. Kaye, who exited Engine last year, believes The Academy will be "braver on recruitment" and more focused on collaborating with talent beyond its four walls.
"We had more talent within Engine’s network but you’re still limited to a network," said Kaye. "The beauty to launching The Academy is there are no limits to that vision."
Both examples illustrate the challenges that entrepreneurial types — who want a stake in their agency's success — can pose to agency buyers. As one publicly-held agency head put it to me earlier this week, "you’re buying the people; if they don’t stay, then you’ve ended up buying nothing."
Kaye would bristle at the notion that Engine bought nothing. Now worth more than £6.5m, Mischief's continued double-digit growth suggests that he built an agency which can outlive its founder's departure. It is also worth noting, furthermore, that Kaye personally recruited new CEO Frankie Cory.
Regardless, both Kaye and the Tonic Life founders — to name just two examples out of many — wanted to start new businesses from scratch rather than staying put. In Tonic Life's case, it is understood that founders Scott Clark, Oliver Parsons and Moira Gitsham investigated options with Huntsworth group before ultimately choosing to leave.
For acquirers, it is tempting to see these scenarios as nothing more than the occupational hazards of agency deals. Is there really anything they can do to mitigate the risk of the founder leaving? I put that question to one agency CEO that has had a certain amount of success in keeping agency founders within the fold after earn-out. He pointed to some specific steps that buyers can take.
Firstly, long relationships between the agencies in question invariably help, particularly when compared to deals that are driven by the short-term need to add billings in specific markets. Providing new opportunities for restless entrepreneurial types is another option, used to good effect at places like W2O Group and Next 15.
At Enero, for example, Frank PR founders Graham Goodkind and Andrew Bloch have remained beyond their earn-out, thanks in part to the holding group returning 25% of the agency's ownership to the duo.
Goodkind, however, notes that the financial stake is not the most important thing for keeping a founder in place beyond the earn-out. The trick that most buyers miss, he says, is safeguarding the emotional connection a founder has with their business.
"You break that at your peril," says Goodkind. "Although you might own the business, you don’t own it emotionally. You leave that in the hands of the founders. If you break that, then the founders don’t feel that connection. They are not necessarily doing it for the money, but if they feel like they are doing it for the money, then that breaks it."
That, says Goodkind, is the best way to safeguard the assets and profits from your shiny new agency purchase. Ultimately, every acquisition carries the risk of the key people leaving within three or four years. For an industry that thrives on reinvention, that is not necessarily a bad thing. For agency buyers, however, it is difficult to see it as a positive outcome, no matter how sanguine they may appear about this particular prospect.
At a more fundamental level, notes the agency buyer, acquirers would be wise to question exactly why they are doing the specific deal. Many, he points out, are simply done for the wrong reasons.
"When you buy just for the sake of adding revenue, it doesn’t work," he said. "The chemistry is just as important as the finances."